Question Details

ACCOUNTING 2101 PART 6

F USING THE PROFITABILITY INDEX, RANK THE PROJECTS, STARTING WITH THE MOST ATTRACTIVEBRIEF EXERCISES


Ex. 94

Diamond Co. is considering investing in new equipment that will cost $900,000 with a 10-year useful life.  The new equipment is expected to produce annual net income of $30,000 over its useful life.  Depreciation expense, using the straight-line rate, is $90,000 per year.  

Instructions
Compute the payback period.

Ex. 95

Madeline Company is proposing to spend $140,000 to purchase a machine that will provide annual cash flows of $25,000.  The appropriate present value factor for 10 periods is 5.65. 

Instructions
Compute the proposed investment- net present value, and indicate whether the investment should be made by Madeline Company.


Ex. 96

LakeFront Co. is considering investing in a new dock that will cost $280,000.  The company expects to use the dock for 5 years, after which it will be sold for $150,000 at that time.  LakeFront anticipates cash flows of $50,000 resulting from the new dock and the company- borrowing rate is 8%, while its cost of capital is 10%.  

Instructions
Calculate the net present value of the dock and indicate whether LakeFront should make the investment.


Ex. 97

Mobil Co. has hired a consultant to propose a way to increase the company- revenues.  The consultant has evaluated two mutually exclusive projects with the following information provided for each project:

	Project Turtle	Project Snake
      Capital investment	$790,000	$440,000
      Annual cash flows	140,000	80,000
      Estimated useful life	10 years	10 years

Mobil Co. uses a discount rate of 9% to evaluate both projects.  

Instructions
(a)	Calculate the net present value of both projects. 
(b)	Calculate the profitability index for each project.
(c)	Which project should Mobil accept?

Ex. 98

An investment costing $90,000 is being contemplated by Mint Co.  The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16,870.

Instructions
What is the approximate internal rate of return associated with this investment?







Ex. 99

Salt Co. is considering investing in a new facility to extract and produce salt.  The facility will increase revenues by $240,000, but will also increase annual expenses by $160,000.  The facility will cost $980,000 to build, but will have a $20,000 salvage value at the end of its 20-year useful life.

Instructions
Calculate the annual rate of return on this facility.